The House Financial Services Committee advanced nine
measures that would allow more swaps to be traded in units of
banks such as JPMorgan Chase & Co. and Citigroup Inc. that hold
government-insured deposits. One measure would force U.S.
regulators to determine the cost of new Basel III capital
charges on banks’ swaps with corporate clients.

“We now have the benefit of almost three years to analyze
the impact of the law, to be able again to analyze the
unintended consequences,” said Representative Jeb Hensarling, a
Texas Republican and chairman of the committee. “Regardless of
your thought of how good the act might be, it was not chiseled
into stone.”

The measures, which would need approval from the House and
Senate before heading to President Barack Obama, are part of an
effort by big banks and their congressional supporters to amend
or limit the regulatory overhaul the president signed into law
less than three years ago. Dodd-Frank requires the Commodity
Futures Trading Commission and Securities and Exchange
Commission to create swap-market rules after largely unregulated
trades helped fuel the 2008 credit crisis.

Legislation ‘Premature’

“In many cases, legislation is premature and aspects would
be disruptive and harmful to the implementation of key
reforms,” Treasury Secretary Jacob J. Lew wrote in a letter
dated yesterday to Hensarling. “We should allow the regulators
to complete their ongoing rulemakings, and then determine what
changes, if any, might be necessary.”

Congressional efforts to change the law have so far failed
to win passage as the CFTC and other regulators seek to finish
writing regulations. Representative Jim Himes, a Connecticut
Democrat who wrote legislation that would alter Dodd-Frank, said
the bills probably won’t become law.

“If I were betting, I would say none of these bills will
become law,” Himes said at a Bloomberg Government breakfast in
Washington on April 25. “I don’t think there’s a lot of
appetite in the Senate to get into which of these bills make
sense and how are they balanced.”

One measure, approved on a 53-6 vote, calls for altering a
requirement that banks with access to deposit insurance and the
Federal Reserve’s discount window move some derivatives trades
to affiliates that have their own capital. Commodity, equity and
structured swaps tied to some asset-backed securities would be
allowed in such banks under the legislation.

‘Legitimate Concerns’

Representative Maxine Waters, the top Democrat on the House
Financial Services Committee, said last year that “legitimate
concerns have been raised about whether pushing a significant
portion of swaps out of banks is the best way to mitigate
against future systemic risk.” Waters today dropped her support
for the measure because she is waiting for regulators to
complete Dodd-Frank rule-writing.

Americans for Financial Reform, a coalition including the
AFL-CIO labor federation as well as other unions and consumer
groups, has opposed changes to the so-called push-out rule.

Sheila Bair, former chairman of the Federal Deposit
Insurance Corp., said today that derivatives trades should be
permitted in bank holding companies, but not funded with insured
deposits.

Pushing Derivatives

“If Congress wants to re-open Dodd-Frank on this question,
if anything, they should push all derivatives activities (other
than the banks’ own hedges) into affiliates outside of the
insured bank,” Bair said in an e-mail. “This would force
market funding of derivatives thus providing substantially
greater market discipline than permitting them to be funded with
insured deposits.”

A second bill, supported by the Securities Industry and
Financial Markets Association, as well as Philadelphia-based
chemical company FMC Corp., would require the U.S. Financial
Stability Oversight Council to examine the costs of
international Basel capital charges for derivatives.

European Union lawmakers insisted on granting exemptions in
Basel rules from the credit valuation adjustment, or CVA, to
banks’ trades with companies in industries such as energy and
chemicals that use swaps to hedge against price swings. The
European lawmakers warned that applying the Basel rules as
planned would drive up such companies’ costs.

European ‘Advantage’

“This exemption will provide a significant financial and
business advantage to European banks,” Stephen Fincher, a
Tennessee Republican, said at the meeting.

The House measure, approved on a 59-0 vote, requires the
10-member council, led by Lew, to determine the costs to U.S.
bank competitiveness from the differences in capital regulations
and recommend ways to limit the impact.

The EU’s exemption for non-financial companies was
necessary partly to counter “an inbuilt bias” toward the U.S.
in this part of the Basel rules, Sharon Bowles, the chairwoman
of the European Parliament’s economic and monetary affairs
committee, said in an interview.

This bias arises from a requirement that firms calculate
the CVA by seeking data from the market on how risky their
counterparty is perceived to be.

Under the Basel rule, this is done either by looking at the
premium that companies’ have to pay to take out credit default
swaps that insure them against losses on the counterparty’s
debt, or by examining the price movements of other co-called
proxy securities.

The deep liquidity of U.S. bond markets, and consequent
high probability that a trader can hedge at an acceptable price,
could favor U.S.-based banks in this respect, Bowles said.

“It’s not that we want special treatment for Europe, it’s
just that the model of using proxies to calculate the risk
doesn’t seem to work anywhere else than the U.S.,” said Bowles,
who led calls to write the exemption into the EU’s Basel III
law. “In Europe, we would have ended up with an artificially
high charge.”